‘It was very exciting. It was rather like leaving a Tiger Moth and getting into a jet plane and, having had a bit of training over the weekend, you were expected to take off in it.’
Jonathan Davie, former partner of Wedd Durlacher Mordaunt & vice-chair of Credit Suisse First Boston
I worked closely with Jonathan Davie in the run-up to the London stockmarket’s ‘Big Bang’, which celebrates its fortieth anniversary on 27th October. He's right, the impact on trading, particularly for market-makers (then called ‘stockjobbers’) was massive. The article in last Saturday's Times describes the huge change for the Stock Exchange, and how it launched twenty years of dynamic growth for the London financial markets.
Long-term listeners to Share Radio may recall my discussion with Simon Rose and the late Brian Winterflood: we looked back to the introduction of dual capacity (the Big Bang process merged the roles of market-makers [principals for their own trading] and stockbrokers [agents for investors]) as the root cause of the financial crash of 2008/9, due to the inability of financial institutions to cope with the conflict of interests. The Times article goes on to explore how Brexit hollowed out much of the London financial markets, and it set out various initiatives which could be taken in the forthcoming Budget to improve prospects.
But there are much deeper threats hanging over the ability of public stockmarkets to provide businesses with access to finance. Our commentary today considers the impact of Private Equity and Quantitative funds (‘Quants’) in undermining free market finance.
Recent figures showing how financial markets have changed provide an assessment of current trading participation in equity markets. In Q1 2025, Janus Henderson Investors estimated that Quant trading accounted for 25% of this activity, two and half times higher than long-only investment institutions. Meanwhile, Bloomberg stated that retail investors accounted for 20.9%. This is not a London-specific phenomenon — it's happening across all financial markets.
Of course, it's great to see that retail investors are still very much holding their own, and all the indications are that young people are particularly active, through a raft of online facilities.
But the rise in the extent of Quant activity is particularly striking. Of course, index-linked and other passive funds have played a big role in stockmarket investment for many years, but the huge growth in use of Artificial Intelligence has replaced so many active institutional investors, such as pension funds, in comprising a significant percentage of today's trading. However, as in so many areas of business we need to ask the question whether Artificial Intelligence can deliver the same forward-looking analysis of business prospects as human judgment, particularly where early stage entrepreneurial activities are concerned.
However, this is not the only ‘dumbing-down’ influence on free markets. The persistent growth in Private Equity has done a huge amount of damage to stockmarket trading: removing businesses from the public market at their lowest points, taking them out of public scrutiny, and then trade-selling them at premium prices following short cycles of transformation — often using large quantities of tax-favoured debt in order to load them with substantial gearing.
Both Private Equity and Quant funds are long-term changes which are substantially impacting our ability to enable free enterprise entrepreneurs to grow their businesses organically in order to take advantage of long-term growth. The lead article in The Sunday Times Business and Money section on 11th October describes the impact in the United Kingdom with this headline: ‘London risks being “incubator” of lost firms’.
But it’s not just London: although their effects are particularly evident in the United Kingdom, they also apply throughout free world financial markets. One of Motley Fool Money’s episodes this week called, ‘The Private Equity playbook most small business owners never get access to’, talks about the challenge for small business owners in the United States.
We really need an economist of the quality of Adam Smith to spell out the long-term risks. As he explained, it’s particularly important that competition remains at the forefront; but both short-termism and the exponentially-increasing degree of automation is making that increasingly difficult.
Politics can also confuse these issues: while it is understandable that Andy Burnham criticises privatisation where competition was excluded (such as water services), he is not correct in blaming our economic ills entirely on Margaret Thatcher and Brexit. Rather, it is the persistent recognition given to Attlee-an universality by both Labour and Conservative Parties which has brought public finances and sluggish growth to their current sorry state.
There is no doubt, however, that when major changes are made such as the ‘Big Bang’ introduction of dual capacity or the privatisation of businesses with embedded monopolies, a long-term and carefully- considered approach must be taken to the regulatory environment. And, in future, the impact of automation must also be taken fully into account within such regulation.
However, none of this should stop us from celebrating the fortieth anniversary of Big Bang. As the Times’ article says, moving on from a culture of boozy lunches, excess traditionalism and, it has to be said, cartels which fixed dealing commissions uncompetitively, was no bad thing: it gave a new lease of life.
Our challenge now remains the need to remember that financial markets are there to serve businesses and entrepreneurs, not vice versa.
Gavin Oldham OBE
Share Radio